(MENAFN- InvestorIdea)
July 8 2015 (www.investorideas.com newswire) The best way to make money from the shale oil boom in Cowboyistan—the Bakken Permian Basin and Eagle Ford shales located in North Dakota and Texas—may be the service providers. Master limited partnerships building pipelines to ship oil from newly cracked shale and companies producing frack sand will be hot stock prospects as the price of oil inches up. In this interview with The Energy Report S&A Resource Report editor Matt Badiali shares the names he is researching in both the pipeline and fracking equipment and materials spaces.
The Energy Report: When we talked last October you predicted that low oil and gas prices would fuel an economic resurgence in the U.S. and impact everything from politics to job creation. Is the economy living up to its potential
Matt Badiali: I think so. Companies moving here and building new factories are citing low energy costs. The average family is saving $1200-2500 per year which is a pretty big savings. But they don't seem to be spending so it hasn't impacted the overall economy as much as I thought it would. On a bigger scale low energy prices beat low-cost wages and low-cost materials: In today's economy low energy costs will bring the economy to you.
TER: It has had an uneven effect on jobs however particularly in oil-producing areas. You recently wrote that Saudi Arabia is playing chicken with oil prices. What impact is the continued flow of oil into the market from the Middle East having on companies in places like the Eagle Ford
MB: It's having massive impacts particularly in the Eagle Ford and the Permian Basin. Harold Hamm CEO of Continental Resources Inc. (CLR:NYSE) calls the three big shale plays--the Bakken in North Dakota Permian Basin in West Texas and Eagle Ford in southeast Texas--Cowboyistan.
This extended period of lower oil prices is causing companies to become more efficient. They're not drilling willy-nilly. In fact 60% of the rigs some 1000 of them aren't working right now and as many as 60% of wells that are being drilled are not being completed--about 4000 of them. The expensive part of shale wells is cracking the rocks cleaning the well bore and plumbing it. That's called completion. It's actually inexpensive to drill the well right now. When the price goes up a lot of inventory is primed and just has to be fracked to start flowing.
However there is a lot of oil that won't be drilled at all at the current price. The experimental shales are where the going is tough. The Tuscaloosa Marine Shale in Louisiana is dead and will probably be dead for a while. Some of the peripheral shales in Colorado and Canada aren't going to work with oil at $60/bbl. Russian Nigerian and Venezuelan oil cost far more than $60/bbl to produce.
Saudi Arabia continues to produce lots of oil in order to put marginal producers out of business. Saudi Arabia has a sovereign wealth fund worth more than half a trillion dollars; it can continue producing at $60/bbl oil for a long time.
TER: How long can the U.S. frackers keep this up
MB: It depends on the company. If you're making a profit you can keep it up indefinitely. If you're not making a profit you're in trouble.
We're seeing mergers and divestitures particularly when it comes to companies that took on massive debt. Take Magnum Hunter Resources Corp. (MHR:NYSE.MKT) for example. The $316 million market cap company has over $950 million in debt. It isn't making any money right now. It recently announced the sale of a major asset--the Eureka Hunter Pipeline in the Marcellus and Utica shales.
I think there will be more of that both in the shale and the Canadian tar sands. Companies are being forced to get leaner. The current lack of investment in development will have a global impact down the road. All Saudi Arabia did was maintain market share and refuse to cut production. Maintaining oil production was important to the Kingdom particularly in the battle with Russia for Chinese market share. However there will be fewer new sources of oil down the road. . .which could lead to higher prices.
TER: From both a short-term and long-term investment approach what oil and gas explorers and producers are doing well and can survive
MB: Right now I am waiting. I'm not buying producers today. I need to see which companies are doing well at lower oil prices. We just completed the first quarter where hedging probably didn't play a role in the bottom lines of producers. I am waiting to see the results.
I do like companies that supply fracking equipment and material. I think there is an opportunity now to buy assets that are going to be useful forever at very low prices. For instance I like the frack sand producers. Engineers have discovered that more sand per well is more economical. I was just at the Energy Information Administration (EIA) conference and heard that in the Permian Basin alone from 2012 to 2014 the average initial production rate rose from 400 barrels a day (400 bpd) to 800 bpd. In two years engineers doubled the volume of oil produced mostly through changing the way they were fracking rocks and a big part of that change was the volume of sand added. Now instead of 500000 pounds companies are using 2 million pounds of sand per well and producing a lot more oil. They are in a sense trading the sand cost for better oil production. That is an easy trade to make.
Companies like Hi-Crush Partners L.P. (HCLP:NYSE) and U.S. Silica Holdings Inc. (SLCA:NYSE) are the beneficiaries of this new demand. We bought these stocks in May and they have been down a bit but I'm happy to buy these companies at these prices because fracking is here to stay. It is the technology that's going to drive U.S. oil production in the future. Good clean Wisconsin sand is going to continue to be valuable even though share prices are a fraction of what they were six months ago.
TER: Both of these companies jumped up last summer and then went right back down again. Was that an anomaly
MB: The move was from May to August and it was the result of the news coming out about how much sand was being used. There were dedicated rail trains 30 cars a day carrying nothing but sand. The demand for sand was enormous.
TER: What will make that price jump back up again What is the catalyst
MB: Remember the 4000 wells being drilled today aren't being fracked They will be. When they are the sand demand is going to skyrocket. Once oil hits $70-80/bbl there is going to be a massive demand for fracking equipment and sand. For people looking for oblique investments in the oil industry sand companies offer the best opportunity right now.
TER: You recently wrote about the challenges of moving all the new production that fracking is making possible. Are we any closer to a solution for getting oil from Canada to U.S. refineries or to consumers in Asia
MB: Yes. The problems we've had moving Canadian oil have been solved or are in the process of being solved. The last leg of a main artery that brings Canadian crude straight to Houston is almost complete. Run by pipeline companies Enterprise Products Partners L.P. (EPD:NYSE) and Enbridge Inc. (ENB:NYSE) the new route runs from Alberta Canada to Houston Texas.
TER: Are there still opportunities to invest in infrastructure solutions--master limited partnerships (MLPs) in particular
MB: Yes. MLPs have also gotten pretty beaten up of late. There are companies that I like in the space. We bought TC Pipelines L.P. (TCP:NYSE) the MLP that TransCanada Corp. (TRP:TSX) owns specifically for that reason. It pays a nice dividend. We've held it for eight months now. Our return is basically flat. Share prices eased lower but we've been collecting dividends.
I think Plains All American Pipeline L.P. (PAA:NYSE) is a great deal right now. This is another oil and gas infrastructure pipeline MLP. It's come down about 30% since its peak in September. For investors looking for a dividend from a pipeline company I like this a lot. It pays about 6% today. One of the reasons Plains All American is down is one of its pipes in California burst resulting in a pretty big oil spill. That's the kind of news that's going to go away fairly quickly but it propelled the shares down and the shares might be an opportunity for investors today.
Some of the MLPs have gone up in price. We looked at Scorpio Tankers Inc. (STNG:NYSE) as one of the potentials. It's up about 40% over the last eight months. This is an attractive company.
TER: You're going to be speaking at the Sprott/Stansberry Vancouver Natural Resource Symposium at the end of July. What is one thing that natural resource investors need to understand about where we are in the energy investing cycle and how to preserve or even grow their wealth
MB: Bear markets in commodities are opportunities. You have to think against the grain in the natural resource sector. You have to put in the hard work to investigate the sector on the way down and then buy stocks when things start to perk up again.
In the oil and gas space we're in the investigations mode. We're looking at companies that we'd like to buy and are high-grading our list. We're looking for companies with low debt and fair to decent operating margins at low oil prices. Those are the ones we're going to buy. But we're not going to buy them until we see an uptrend. Oil has had a small uptrend. It has bounced off its bottom. We are getting a lot closer today to buying these companies than we were even a month ago.
TER: Thanks for speaking with us Matt.
Matt Badiali is the editor of the S&A Resource Report a monthly investment advisory that focuses on natural resources including silver uranium copper natural gas oil water and gold. He is a regular contributor to Growth Stock Wire a free premarket briefing on the day's most profitable trading opportunities. Badiali has experience as a hydrologist geologist and consultant to the oil industry. He holds a master's degree in geology from Florida Atlantic University.
Want to read more Energy Report interviews like this Sign up for our free e-newsletter and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators visit our Interviews page.
DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC publisher of The Gold Report The Energy Report and The Life Sciences Report and provides services to Streetwise Reports as an employee. She owns or her family owns shares of the following companies mentioned in this interview: None.2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.3) Matt Badiali: I own or my family owns shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.6) From time to time Streetwise Reports LLC and its directors officers employees or members of their families as well as persons interviewed for articles and interviews on the site may have a long or short position in securities mentioned. Directors officers employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.
Streetwise - The Energy Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer) but (ii) never in part.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
101 Second St. Suite 110Petaluma CA 94952Tel.: (707) 981-8204Fax: (707) 981-8998Email: jluther@streetwisereports.com
More Info:
This news is published on the Investorideas.com Newswire and its syndicated partner network
Get free news alerts: Sign up here
Published at the Investorideas.com Newswire - Big ideas for Global Investors
Disclaimer/ Disclosure: The Investorideas.com newswire is a third party publisher of news as well as creates original content as a news source. Original content created by investor ideas is protected by copyright laws other than syndication rights. Investorideas is a news source on Google news and global syndication partners. Our site does not make recommendations for purchases or sale of stocks or products. Nothing on our sites should be construed as an offer or solicitation to buy or sell products or securities. All investment involves risk and possible loss of investment. This site is currently compensated by featured companies news submissions and advertising. Contact each company directly for press release questions. Disclosure is posted on each release if required but otherwise the news was not compensated for and is published for the sole interest of our readers.
BC Residents and Investor Disclaimer: Effective September 15 2008 - all BC investors should review all OTC and Pink sheet listed companies for adherence in new disclosure filings and filing appropriate documents with Sedar. Read for more info: http://www.bcsc.bc.ca/release.aspxid=6894. Global investors must adhere to regulations of each country.
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.